Company SIPP, Asset Allocation and the Paradox of Choice

JamTomorrow

To cut a long story short the company I work for has changed the pension provider we use and for the past 2 months I have been contributing to the default asset allocation below :-

Over 5 Year IL Gilts Idx 25%

AAA-AA-A CrpBnd All Stks 30%

UK Equity Index 5%

World (Ex-UK) Equity Idx 30%

Global Emerging Mkts Idx 10%


Now even in my unqualified assessment this appears inappropriate for someone my age (34) with the best part of 30 years until I take my pension and therefore I want/need to take more active involvement in the asset allocation.

In my previous money purchase pension there was relatively little choice of funds, about 12 in total, but now I’m faced with the paradox of choice as in the new L&G SIPP there are hundreds, if not thousands, of funds to choose from. I’m overwhelmed with what investment decisions to take and don’t want it to lead to paralysis and therefore no choice at all.

I guess my first question is roughly what would a fee only IFA cost to advise me on asset allocation and then based on that figure opinions on whether it represent value for money over what I could achieve myself with a bit of research and the use of forums such as this one?

There is no doubt in my mind that the right IFA can, on balance, provide a ‘better’ asset allocation than I could which would, on average, result in a higher value fund in 30 years time. However I’m not clear whether the incremental gains would be greater than if I were to take what the fee would have been and invest that in my pension instead. This is an issue that I guess is further exacerbated if there are annual repeat fee's for re-alignment of my pension portfolio with an IFA.

My second question would be whether I should transfer the pension from the previous provider into the L&G SIPP or keep it separate to diversify my holdings even more and if I use a fee only IFA would the cost of investment advice be the same regardless of whether I included my previous pension pot (valued at about £90k)?

Finally, what are good sources for researching the asset allocation that best suits my profile and can I then receive feedback on this forum of my choices as long as it is not given as advice?

A trawl of these forums as provided the following as examples of good reading material and I’d appreciate advice on these or recommendations for others :-

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk - William Bernstein

Asset Allocation, 4th Ed: Balancing Financial Risk - Roger Gibson


In addition, I came across this asset allocation in an old post from dunstonh on these forums and wondered whether this still was still valid today and a good starting point for my own assessment?

European 10%
Far East 4%
Emerg Mkts 4%
Specialist 6%
Japan 6%
N America 10%
Property 27%
UK Equity 28%
Fixed Interest 5%


Thanks in advance for any views shared.

dunstonh

In addition, I came across this asset allocation in an old post from dunstonh on these forums and wondered whether this still was still valid today and a good starting point for my own assessment?

European 10%
Far East 4%
Emerg Mkts 4%
Specialist 6%
Japan 6%
N America 10%
Property 27%
UK Equity 28%
Fixed Interest 5%

That is a very old sector allocation. I havent seen property that high for some time. Western economies have fallen back as well. Asset allocations are not cast in stone. They are fluid as the economy changes. Typically, you get quarterly updates. Also, that allocation is just one risk profile out of 10.

I guess my first question is roughly what would a fee only IFA cost to advise me on asset allocation and then based on that figure opinions on whether it represent value for money over what I could achieve myself with a bit of research and the use of forums such as this one?

How long is a piece of string. The problem with the regulatory situation at this time is that whilst you only want limited advice, that would not be recognised by the regulator. The adviser would have to do the full works getting information and do the full works giving the advice where it is done on the record.

There is no doubt in my mind that the right IFA can, on balance, provide a ‘better’ asset allocation than I could which would, on average, result in a higher value fund in 30 years time. However I’m not clear whether the incremental gains would be greater than if I were to take what the fee would have been and invest that in my pension instead. This is an issue that I guess is further exacerbated if there are annual repeat fee's for re-alignment of my pension portfolio with an IFA.

Rebalancing consistently shows gains over portfolios left to their own devices. On smaller pensions the cost may not be worthwhile but on larger ones it would.

My second question would be whether I should transfer the pension from the previous provider into the L&G SIPP or keep it separate to diversify my holdings even more and if I use a fee only IFA would the cost of investment advice be the same regardless of whether I included my previous pension pot (valued at about £90k)?

depends on the costs and features. The L&G SIPP is not exactly the best priced one. So, you need to look at value for money and if the options being paid for are worth it or can be improved upon elsewhere.

ColinJS

An IFA could simply assess your attitude to risk and provide you with an asset allocation to suit (they often use simple questionnaires and online tools for this). I imagine the fee would be very reasonable. But this will by no means be a substitute for regular reviews of your circumstances. The danger of asset allocation is that it remains either static (rebalancing every year back to the original) or completely skewed (if not rebalanced). The key is to regularly assess your attitude to risk and tailor your portfolio accordingly and in line with your aspirations. This isn't a 'one size fits all' issue by any means.

JamTomorrow

Thanks for the responses so far but I am still undecided and not feeling any compelling reasons to invest in using an IFA just yet. I suspect I will end up making my own attempt at an allocation and think about using an IFA in the future when I have a larger pot.

ColinJS wrote: »

(they often use simple questionnaires and online tools for this). I imagine the fee would be very reasonable.

I'm quite intrigued by this and whilst I recognise a lot of individuals would benefit from discussion with an IFA it would be great for me if I could simply pay for an online tool to derive an asset allocation and then do with as I please. I assume no products like this exist for the general public and I would have to go through an IFA?

ColinJS wrote: »

The danger of asset allocation is that it remains either static (rebalancing every year back to the original) or completely skewed (if not rebalanced). The key is to regularly assess your attitude to risk and tailor your portfolio accordingly and in line with your aspirations. This isn't a 'one size fits all' issue by any means.

This concerns me about going it alone as I think that my approach would, with few exceptions, be to rebalance back to the original allocation. My probably flawed logic about this is that by rebalancing to a new allocation means I have to, on average, get the timing right for that sector and not just merely rely on pound cost averaging over time.

If i rebalanced more into property ahead of a crash, and then rebalanced back out property ahead of a boom I'd be concerned that poor timing would result in lower returns than merely relying on pound cost averaging in a fixed allocation until I am say 10 years from retirement. Whilst I'm pretty sure I'd get the timing wrong I am not convinced that annual updates with an IFA would get the timing right either. Is there something I am missing here or is there evidence that rebalancing to a new allocation performs better than reallocating to a pre-determined fixed allocation?

dunstonh wrote: »

Rebalancing consistently shows gains over portfolios left to their own devices.

Do you know if this is versus rebalancing back to a fixed allocation or just to no rebalancing whatsoever.

dunstonh wrote: »

depends on the costs and features. The L&G SIPP is not exactly the best priced one. So, you need to look at value for money and if the options being paid for are worth it or can be improved upon elsewhere.

My company is covering the AMC's in both the old scheme, if we choose to leave our investments there, or the new scheme. The FMC's on the core fund range with L&G have been negotiated to be in line with the FMC's at the old provider. I would prefer to have all my pension in one location and therefore in time I think I will transfer into the L&G SIPP. However until I have decided on an asset allocation I will leave it where it is. I was only thinking of leaving the investments in the old scheme to provide more diversification but this may also be flawed logic.

dunstonh

Do you know if this is versus rebalancing back to a fixed allocation or just to no rebalancing whatsoever.

Back to the original allocation as that is easy to show.

With fluid sector allocations you are looking at sectors which may be undervalued/overvalued and making an opinion. That opinion may turn out right or it may turn out wrong. Only time will tell. However, you tend to find that there are not big swings in the short term. If you take the sector allocation you mentioned above and look at property, that would be 15% now. However, a few years back that fell down to 0-5%. The core sectors tend to be closer to 1-5% swings over the long term.

Until the value builds up though , it can be largely pointless trying to play around with sector/asset allocation. i.e. even if you have £20,000 in the pot, 3% of that is just £600. Then if that sector grows by 2% more than another then that is a gain of just £12.

Yes you should diversify but dont over complicate it when the values are small.

JamTomorrow

Having decided to do this myself I have tried to choose a sector allocation which reflects an appetite for greater risk for the potential greater returns in the long-run.

I will be investing around £90k into this plus contributions of about £15k/year. I plan on re-allocating annually if appropriate - although still not sure how I will know whether a re-allocation is appropriate.

The allocation I have chosen is below and I would appreciate any comments as to whether this is way off and I should really think about seeking professional advice, or if it is fit for purpose and not too dissimilar from what I would get from an IFA.

GILTS - 10%
Bonds - 10%

UK - 18%
Europe - 8%
US - 8%

Property - 16%

Emerging - 20%

Specialist - 10%

A summary of the individual funds can be seen here if necessary.

The MorningStar ratings, here, appear reasonable, but I wonder if I should strive to just have 4 or 5 star rated funds? A couple of the property funds I have chosen are 3* - are these poor funds?

An X-ray of this allocation here and here also illustrates how the allocation above does not translate into the same allocation within the selected funds but I suspect the increase in the UK and US is because of the property funds.

One concern I do have is the allocation to Bonds/Gilts as I keep reading that a bubble may developing there. Are people lowering their exposure to Bonds/GILTs at the moment?

Any thoughts/comments duly appreciated.

Linton

Your new allocation looks fine to me. One can argue the details but with your broad overall allocation initial detailed changes are not likely to make that much difference. Bonds & Gilts may be a bit overvalued now, but I wouldnt be too bothered - you are in this for the really long term, allocation is more important than short term rises and falls.

The important thing from now on is to keep the % allocations in balance on say an annual basis. In a year's time have another look - if gilts/bonds have fallen and emerging risen transfer some from emerging to bonds/gilts. In that way you are selling in the markets which are relatively high and buying in the markets which are relatively low.

dunstonh

The allocation I have chosen is below and I would appreciate any comments as to whether this is way off and I should really think about seeking professional advice, or if it is fit for purpose and not too dissimilar from what I would get from an IFA.

Its missing Asia and Japan and seems very heavy in emerging. You tend to find emerging and specialist tend to be the same/similar.

One concern I do have is the allocation to Bonds/Gilts as I keep reading that a bubble may developing there. Are people lowering their exposure to Bonds/GILTs at the moment?

A bubble in bonds is not on the same scale as a bubble in equities. They are certainly less attractive than they were and some areas do appear to be overpriced but then some areas are still believed to have potential. However, their main benefit is with rebalancing and asset spread. Plus, you only have 10% in each.

JamTomorrow

dunstonh wrote: »

Its missing Asia and Japan and seems very heavy in emerging. You tend to find emerging and specialist tend to be the same/similar.

Agree on it missing Japan but a portfolio x Ray indicates nearly 30% in Asia. I'll probably switch the emerging Asia fund into a japan specific one.

I was also unsure about the exposure to Emerging but not sure what else to expose myself to. Any other obvious omissions other than Japan?

JamTomorrow

Linton wrote: »

In a year's time have another look - if gilts/bonds have fallen and emerging risen transfer some from emerging to bonds/gilts. In that way you are selling in the markets which are relatively high and buying in the markets which are relatively low.

I hadn't thought of it this way before so this will be a helpful starting point when I come to rebalance in 12 months. Thanks.

Linton

JamTomorrow wrote: »

Agree on it missing Japan but a portfolio x Ray indicates nearly 30% in Asia. I'll probably switch the emerging Asia fund into a japan specific one.

I was also unsure about the exposure to Emerging but not sure what else to expose myself to. Any other obvious omissions other than Japan?

I would be very wary of Japan and much prefer to ensure the investments are in Taiwan/S Korea/China etc. The two markets are very different, Japan hasnt provided any real growth for many years.

Other areas to consider - technology, raw materials, UK small companies.